Senators Question Regulators on Banking System Exposure to Crypto Risks
Commentary by Steven Lofchie
Senator Elizabeth Warren (D-MA) and Senator Tina Smith (D-MN) asked U.S. banking regulators to provide information on banks' relationships with cryptocurrency firms and how each regulator assesses banks' exposure to cryptocurrency-related risks.
In separate letters to the Federal Reserve Board, FDIC and OCC, the Senators asked the regulators to detail their policies regarding how each regulator assesses banks' ties to crypto firms and the related risks. The Senators said that recent events in crypto markets revealed that crypto firms "may have closer ties to the banking system than previously understood." The Senators asked the regulators to identify (i) banks that have engaged in crypto-related activities and (ii) the crypto-related activities in which banks have engaged (e.g., custody, deposits, money transfers and loans), along with an estimated total dollar volume of those activities.
The Senators also requested information relating to FTX sister company Alameda Research's investment in Moonstone Bank, including whether Alameda's investment in Moonstone constituted control under the Bank Holding Company Act. The Senators asked for information on (i) Alameda Research's and FTX's business relationships with Moonstone Bank and its holding company and (ii) the source of the funds for Alameda's investment.
The Senators asked the regulators to respond by December 21, 2022.
Commentary
Senator Warren's questions cover a broad range of crypto-related activity. It is not clear whether any of them might lead to new insight; e.g., there is no obvious concern as to banks providing custodial services to digital assets. (In fact, if banks had been the entities providing custodial services, perhaps investors would have had custodians within the banks, which would have been good.)
It is certainly worth looking at Alameda's investment in Moonstone Bank. The House Financial Services Committee, chaired by Rep. Maxine Waters (D-CA), has previously taken testimony from Sam Bankman-Fried, the CEO of FTX. Representative Waters invited him to testify again, which he reportedly agreed to do. After the new Congress is installed, the House Financial Services Committee is likely to push for a reprise, and to have their own questions to supplement those raised by Senator Warren.